Cyient Rating: Buy — Quarter showing beat expectations

Cyient’s Q1FY21 revenue fell 12.5% q-o-q owing to >20% q-o-q dip in its A&D.

Cyient reported marginally better-than-expected revenue of $130.6 mn (down 12.5% q-o-q versus 14.2% decline estimate) for Q1FY21. Operating margin also sprung a positive surprise—fell 320bps q-o-q to 5.2% versus our ~5.0% decline estimate. Revenue declined due to sharp ~20% q-o-q fall in aerospace, utilities, transportation and semi-con businesses. Margin fell 320bps largely due to one-time costs (259bps). Management has called out Q1FY21 as the peak pain quarter and estimates 3% CQGR in balance quarters of FY21.

We believe, unlike the IT services industry, the ER&D industry, in which Cyient and LTTS operate, has a higher correlation with Covid-19 and lockdowns. Nevertheless, factoring in the current beat, we revise up FY21/22e EPS 9.7%/0.7%. Maintain Buy with revised TP of Rs419 (earlier Rs 360) 12x FY22e.

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Services business plummets; A&D, utilities, semi-con too take a hit

Cyient’s Q1FY21 revenue fell 12.5% q-o-q owing to >20% q-o-q dip in its A&D, utilities and semi-conductors businesses. While the DLM business grew ~8% q-o-q, its small base could not offset the decline in services. Though growth has been sharp, mgmt terming it a bottom and estimating 13% decline in FY21 implies 3% CQGR, which we perceive as encouraging.

Covid-19 and one-offs shock margin

Normalised Ebit margin stood at 5.2%, down 320bps q-o-q due to: (i) 289bps impact of sharp fall in volume growth; (ii) 259bps one-time restructuring impact; (iii) 134bps adverse revenue mix hit. Cyient did have tailwinds of 185bps, 110bps and 104bps from reduction in SGA costs, efficiency and forex, respectively. Management guided for gradual margin recovery to 8% over the next few quarters.

Outlook: Valuation comfort

Cyient performed a tad better than expected on revenues and margin. The key positive is the CQGR guidance of 3% for the balance quarters of FY21e. It puts to rest speculation around growth/earnings amid Covid-19. We remain structurally positive on ER&D, but Plant Engineering and A&D are in a spot. Recovery, hence, would be back-ended. Even so, we believe the stock looks attractive trading at 9x FY22e. Maintain ‘BUY/SP’.

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